Are you considering buying a business but new to mergers and acquisitions? Despite how well-established another company is, how successful they’ve been, or how amazing their culture and team appear, you should never acquire a business without doing your due diligence.
There are many factors to consider before jumping into a deal. Plus, you’ll need a team of advisors behind you. These include your accountant, CPA, legal counsel, and, of course, human resources – because the people on both sides should be your priority.
Keep reading for 14 tips to ensure a successful business acquisition and smooth transition for all team members.
1. Put people first.
Take it from your friendly neighborhood HR team – employees are your most important asset during a business acquisition and beyond.
If you are buying a business, get to know the employees. Specifically, make sure the key employees will stay following the acquisition. These are managers and staff members who understand the company’s inner workings and know the customers inside and out. They may also be operators of machines and technology.
Remember, an acquisition has a significant impact on the employees of both entities. Create a plan with the seller to communicate the purchase to employees as clearly and early as possible. This means before any clients and media find out since you do not want employees to find out from other sources.
If the seller is hesitant to inform employees that the company is for sale for fear of them quitting, have your counsel include terms in the sales contract stating that:
- You and the seller will announce the sale to employees 48 hours before closing.
- You will have the opportunity to meet with key employees before closing to ensure they will continue to work for the business.
- You can call off the deal if you do not feel that critical employees will stick around at least long enough for you to learn what they already know.
2. Focus on management.
This one ties in with the above point. Do your research, then get to know the target company’s management. You should understand their strengths and weaknesses, so you know who will be helping you lead the company.
This will also help you identify talent that should be developed and retained and where you will need to bring in new leadership.
3. Ensure all workers are properly documented.
In addition to prioritizing and communicating with the teams of both companies, you should also ensure everyone’s documentation is correct and updated – and that they’re documented in the first place! Review:
- Employees vs. contractors: Ensure they’re classified correctly for tax and benefits purposes.
- Full-time vs. part-time employees: Ensure workers receive the right benefits, wages, and overtime if applicable.
- Employment contracts: Check for any retention/contingency bonus or other bonus programs.
- Fringe benefit recognition: Are all employee gifts, bonuses, etc., appropriately taxed?
4. Consider the strategy behind the acquisition.
First of all, make sure you have a strategy. Why do you want to buy the business? The answer shouldn’t simply be because you can, and the brand is attractive!
Determine if the business acquisition will:
- Align with your vision and mission.
- Allow you to diversify and create new revenue streams.
- Boost your revenues and profit margins.
- Provide you with a new group of employees to enhance your current team.
- Complement your current business model.
5. Understand what you’re acquiring.
You should also know what you’re acquiring as you consider the strategy. Is it the:
- Brand?
- Team?
- Clients?
- Product?
- All of the above?
Just beware that you’ll also be acquiring the target company’s liabilities. Either way, you should purchase the assets and not the business itself. Form a separate company and buy the assets under that entity. This ensures that:
- Your tax basis in the assets will be the amount you paid for them instead of the seller’s original amount.
- You won’t assume any liabilities if the seller owes money to people or is being sued.
6. Dig into everything.
Your mergers and acquisitions team should thoroughly investigate three critical areas of the target company:
Taxes: Does the seller owe sales, use, payroll, or other taxes? Find out if they were using a payroll service and make sure they’re current. You should have the state tax authority issue a “clearance letter” stating the seller is current in their sales and use tax on the closing date.
Prepaid expenses: These are not usually included in the set purchase price but instead added at the closing. Ask the seller for a list of closing adjustments, or amounts they’ve prepaid that will have to be prorated, so that you can budget for them. For example, if the seller has paid for property taxes or some type of annual dues (e.g., membership or certification), they might want to be reimbursed for the year’s portion when you start running the business.
Commitments and contingencies: Review a copy of all contracts the seller has with vendors for nuances and items within each contract.
This also includes leases if the seller is leasing their business facility. Review the lease and determine how much time remains in the term. Will the landlord let you assume the lease without increasing the rent? Can you negotiate a new lease now for five to 10 years? If the seller has paid a security deposit, they might want you to buy that and the rest of the business assets you’re purchasing.
Additionally, both landlords and vendors might ask for an additional security deposit, increased length of term, and/or a personal guarantee.
7. Ensure both sides have indemnity.
Even if you do everything right and your counsel, accountants, and HR team are as thorough as possible, things can be missed. You could be sued for something the seller did before you buy the business. Likewise, the seller can get sued for something you do (or don’t do).
Each side should give the other indemnity, an agreement which states that one party will not be liable for defending and paying penalties and legal fees for a lawsuit caused by the other party.
8. Work with a third-party acquisition mediator.
Hire a third-party mediator who specializes in mergers and acquisitions. They will help keep things cordial and prevent issues during emotional moments in the negotiation. This will ensure you maintain a positive, productive relationship with the seller.
9. Develop a thorough integration plan.
You should know what steps come after the business acquisition deal is closed. Basically, you have two options:
- Set clear expectations for your management team on their responsibilities and the amount of time they will need to allocate to integration after acquisition
- Have a dedicated integration or onboarding team to focus on integration
Set short- and mid-term goals. Your integration should take a holistic approach to systems, processes, policies, and people. Get everyone on the same page!
10. Trust but verify.
If you can, inspect the building. The last thing you want is to find out it needs $15,000 of electrical work after you’ve already acquired the company.
The same goes for the assets you’re acquiring – inspect them all! You should conduct an inventory and hire a third party to do a valuation.
And if the seller doesn’t allow you to do these things, take it as a red flag.
11. Decide who will handle the accounts receivable.
Some of the target company’s customers will likely have outstanding bills on the closing date. Who will be responsible for handling the accounts receivable? The buyer and seller have two options:
- The buyer can purchase the accounts receivable at a discount, assuming some customers won’t pay
- The seller collects on the bills
Either way, when a buyer purchases the accounts receivable, they should review for credits and have the seller take responsibility for them or factor them into the overall price of the accounts receivable.
12. Draft a letter of intent.
A letter of intent (LOI) is a letter declaring the preliminary commitment of two parties to do business with each other – and a critical document in every business acquisition. It outlines the chief terms of the prospective deal and works out the “big stuff” before finalizing the details of the transaction.
An LOI often includes terms stating that the deal is contingent upon financing being secured by one or both parties or that the agreement may be nullified if the paperwork is not signed by a set date. While it’s not legally binding, the LOI helps:
- Identify the main points of the deal that must be negotiated
- Purchase price and how and when it will be paid
- Assets that will be sold to the buyer (and those the seller will keep)
- Protect all parties involved in the deal
- Terms of the seller’s noncompete, nondisclosure, and non-solicitation agreement
Getting clarity on these significant areas before attorneys start drafting the actual legal contracts for the sale helps them get sale documents right in one or two drafts. Then, the contracts won’t be subject to further negotiation. Overall, it leads to a much cleaner, more efficient process.
13. Beware of bulk sales laws.
States like New York and California have bulk sales laws, which require the buyer of a business to notify the seller’s creditors of the transaction. A bulk sales law is intended to protect a company’s lenders and prevent a business owner from selling everything and taking off with the money without paying their lenders.
The state tax authority will likely want a copy of the bulk sales notice even if the seller has no creditors so they can find out if the seller owes any sales, use, or other business taxes.
If the seller owes any taxes, they will have to pay them before the deal is closed. If they owe debt, some states even require the funds to be put in escrow so creditors can submit claims into the escrow and be paid.
As the buyer, you must understand and ensure the transaction complies with your state’s bulk sales law. If it does not, you could be liable for the seller’s debts.
14. Make sure the seller is willing to help with the transition.
Both customers and employees have a relationship with the owner, who can help ease potential concerns and show you the ropes. Come to an agreement with the seller to stay and guide you through the transition, familiarize you and your team with customers and new employees, and help you figure out the books. Part of this negotiation should include paying them for their time.
Caring for Your People During a Business Acquisition
Do you need support to ensure employees on both sides of the company acquisition are taken care of? BlueLion will guide your leadership on the communication and management of both teams. We can also audit the target company’s employee paperwork to ensure everyone is documented correctly.
Contact us today at 603-818-4131 or email info@bluelionllc.com to learn more about how we can help you remain compliant and ensure a smooth transition!
The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.
